Equity Markets and Economic Development: What Do We Know



the bank’s subjective expected variance in the distribution of riskiness of group j should be
larger than the other group
i. As a consequence, the banks' expected return from lending to
group
i can be higher than that to group j (i.e., EΠi*)EΠj * ), although the expected
productivity of the latter is higher than that of the former (i.e.,
Ri{Rj). This results in a
suboptimal allocation of savings.

Turning to equity markets, investors do not take default risk into account as their expected
returns
EΠj* are equivalent to the project’s expected return, i.e. EΠj* = Rj . Potential
shareholders pick up their investment decisions based on comparison of expected
productivities, which are known. This allows riskier groups (such as group
j) to obtain
financing. The model concludes that equity market development contributes to full capital
allocation efficiency, especially in the presence of information assymetries in the credit
market (Cho, 1986). Recent contributions have proposed intuitive refinements of this
argument. For instance, institutional economists have highlighted that banking systems in
developing countries are often characterized by a high ownership structure resulting in
oligopolistic practices. In such systems, the selection of investment projects based on
expected operating results can be disturbed by strategical political interactions between
agents, which results in suboptimal investment decisions, and in a weak corporate sector. The
poor allocative performance of the bank-based financial structure then magnifies the relative
advantages of equity markets (Henry & Springborg, 2004). Other studies have underlined the
liquidity-enhancing function of equity markets. The creation of a domestic stock market in
developing countries may provide households with an additional instrument which may better
meet their risk preferences and liquidity needs (Dailami&Atkin, 1990). Domestic stock
investment may thus constitute an alternative to consumption, the purchase of land and real
estate, or the seeking of more profitable investment abroad, ultimately resulting in a higher
mobilization of savings (Oshiloya & Ogbu, 2003). Some have also underlined the role of a



More intriguing information

1. The name is absent
2. Large-N and Large-T Properties of Panel Data Estimators and the Hausman Test
3. Wirtschaftslage und Reformprozesse in Estland, Lettland, und Litauen: Bericht 2001
4. Technological progress, organizational change and the size of the Human Resources Department
5. Permanent and Transitory Policy Shocks in an Empirical Macro Model with Asymmetric Information
6. Cryothermal Energy Ablation Of Cardiac Arrhythmias 2005: State Of The Art
7. The name is absent
8. A methodological approach in order to support decision-makers when defining Mobility and Transportation Politics
9. The name is absent
10. Standards behaviours face to innovation of the entrepreneurships of Beira Interior
11. Co-ordinating European sectoral policies against the background of European Spatial Development
12. MANAGEMENT PRACTICES ON VIRGINIA DAIRY FARMS
13. The Distribution of Income of Self-employed, Entrepreneurs and Professions as Revealed from Micro Income Tax Statistics in Germany
14. The name is absent
15. A Consistent Nonparametric Test for Causality in Quantile
16. The name is absent
17. The effect of globalisation on industrial districts in Italy: evidence from the footwear sector
18. Midwest prospects and the new economy
19. A THEORETICAL FRAMEWORK FOR EVALUATING SOCIAL WELFARE EFFECTS OF NEW AGRICULTURAL TECHNOLOGY
20. Cyclical Changes in Short-Run Earnings Mobility in Canada, 1982-1996